The franchise financing forecast for 2011

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Business hopes are running high for 2011. With experts from Federal Reserve Chairman Ben Bernanke to Federal Deposit Insurance Corporation head Sheila Bair predicting financing to loosen up and a slew of surveys reporting increased small business optimism for 2011, franchise opportunities are set to become more affordable.

However, since it can be difficult to predict the future, the Web site AllBusiness checked in with several experts to mine their thoughts on what prospective franchisees can expect this year in terms of financing.

The site first looked to Ronald Feldman, CEO of franchise financing specialist Siegel Financial Group. Feldman was cautious with his predictions, saying that while financing will be possible to obtain for franchises, it will depend on a number of factors such as how established the franchise is, the franchisee's qualifications and how appealing the overall application is.

"The application package is probably the biggest hindrance to getting loans approved for new franchisees," Feldman told AllBusiness. "Having a professionally prepared package that answers the initial credit reviewer's questions is paramount to getting into the formal underwriting process. Incomplete or poorly prepared packages will be tossed in the round filing cabinet."

Prospective franchisees will continue to receive help with lenders from franchisors in 2011. Savvy franchise systems have built relationships with lenders to create specialized finance programs for franchisees, Feldman explains. For example, some franchisors are providing credit enhancements to lenders, while others are allocating resources to these institutions.

Joel Libava, a franchise advisor, agrees with Feldman's assessment that obtaining funding will be possible yet difficult. Libava explains that being approved for a startup franchise loan will require prospective franchisees to pass a number of tests, while past assets, such as real estate, may no longer be of value.

"If a prospective franchise owner applies for a startup franchise loan, things like high debt, home equity status, and negative credit will be real red flags for the bank’s underwriters," said Libava.

Finally, Edith Wiseman, the executive vice president of franchise research company FRANdata, concurred with Libava and Feldman, tempering her hopes for the future with some doubts about banks. She said that current data is indicating positive growth for the economy, however, it is not yet strong enough to ease credit standards.

"Financing will continue to be challenging in 2011 because small business lending isn’t easy," she added.

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